Life
insurance

Life insurance policies pay out a lump sum of money when you die. Sometimes they only pay out if you die during a certain period of time. The amount may be agreed at the start or it may build up in value.

You will normally pay monthly payments called premiums. These will be set at the time the policy begins. If you have cancer, you may be offered higher premiums or refused insurance altogether. Some brokers specialise in arranging cover for people with health conditions.

Check whether your employer offers a group life insurance scheme. Plans also exist for people over the age of 50 that don’t take health into account.

Cashing in or selling a policy early may be possible. Remember, the cash-in value may be low and it won’t pay to your beneficiaries. Some policies also include a ‘terminal illness benefit’. This means that the full amount of cover will be paid if you are expected to live for less than 12 months. To reduce inheritance tax on a payout, ask your insurer about putting a life policy in trust. This means it goes directly to someone you choose.

Buying life insurance

Life insurance is a type of insurance that pays out when you die. Sometimes it only pays out if you die during a certain period of time.

Life insurance is helpful for two main reasons:

It can pay off debts left behind, such as a mortgage.

It can provide money for your family after you die.

Mortgage providers often try to sell people life insurance when they take out mortgages. You don’t have to buy life insurance from your mortgage provider. It is important to search for the best insurance for your situation. If you are thinking of buying life insurance, it is always a good idea to contact your mortgage provider to check if you have life insurance included in your mortgage repayments.

Life insurance through an employer

Many employers offer life insurance to employees on a group basis. This means all their employees can get life cover through an insurer that the employer has chosen. Cover is often provided up to a set amount of money for employees who have joined the scheme, and this cover is not affected by any health conditions they may already have. Many employers also offer a type of insurance called ‘death-in-service’ benefit.

Contact your HR department at work to find out whether your employer offers a group life insurance scheme that you can join.

Putting a policy in trust

When you die, there may be inheritance tax to pay on your estate. Your estate is everything you own at the time of death, minus anything you owe. This includes possessions, money and debts.

Normally, it would also include any payout from a life insurance policy, but you can arrange to have most life insurance policies written in trust. This means that instead of the payout being part of your estate, it goes directly to whoever you nominate, such as your partner or children.

Doing this may reduce the amount of tax due on the payout. It will also make sure whoever you nominate will get the payout. Not putting a policy in trust means they have to wait until your estate is sorted out after your death, and this could take months or even years.

Ask your insurer about putting a life policy in trust. There is usually no extra charge for doing this.

How cancer can affect buying life insurance

If you have had cancer or you are living with cancer and you want to buy life insurance, you will usually be offered a higher premium than average. Or you may be refused cover altogether. Cover with an exclusion for cancer-related claims would be very unusual.

Whether or not you can get life cover, and the terms of the cover, will depend on the type of cancer you have and the stage it is at. The insurer will want a medical report and may ask you to have a medical examination.

Some insurance brokers specialise in arranging life cover if you have existing health problems. But, it is difficult to predict if an insurer will provide cover, because the decision will always depend on your personal situation.

I didn't have life or critical illness insurance, which I now regret as I was entitled to nothing. If I'd had it, my mortgage would have been paid during treatment.

Laura

Types of life insurance

There are four main types of life insurance:

Level term insurance – this pays out a lump sum if you die within a certain time period. You agree the lump sum amount when you set up the policy, and it does not change.

Decreasing term insurance – this is often taken out with repayment mortgages. The amount you are covered for decreases as you pay off more of your mortgage.

Whole of life insurance – this builds up in value and pays out when you die. It can be used as an investment, for protection, or both.

Endowment insurance – this pays out a lump sum if you die within a certain time period. If you do not die within the term, it pays out at the end of the term. This type of life insurance builds up value as an investment. Some endowment policies will pay out if you are diagnosed with a critical illness.

If you have questions about your insurance policies, contact your insurer. You can also speak to our financial guides.

Death-in-service benefit

Many employers offer a type of life insurance called ‘death-inservice’ benefit. This guarantees a lump-sum payout if you die while working for that employer. You can usually choose who you would want this payment to go to. These are called your beneficiaries. But sometimes death-in-service payouts go into a discretionary trust. This means you cannot choose exactly who will benefit. In some cases the trustees may let you tell them who you would like any payout to go to. This is done using an ‘Expression of Wish’ form.

If you are thinking about giving up your work due to ill health, it’s important to check with your employer what would happen to any life insurance cover they provide.

Over-50s plans

Over-50s plans are designed to pay a lump sum into your estate when you die. They are mainly for people aged 50 to 85 who do not already have a life insurance policy. People aged 50 to 85 who do have life insurance can also buy them.

You may choose to take out an over-50s plan if you are saving money for a certain reason, such as a funeral, and want to keep this separate from your life insurance.

Over-50s plans do not require medical underwriting. This means your health will not be taken into account when you apply for the policy. The payout is also not affected if your health is poor when you take out the policy. For these reasons, over-50s plans can be suitable if you have existing health problems.

The monthly payments are usually an affordable amount, but the final payout may not be large. If you live for many years after you take out the plan, you may end up paying in much more money than is paid out when you die. If you die within two years of starting an over-50s plan, you may not get a full payout. But there may be a refund of the money that had been paid into the plan.

Some people prefer to pay for their own funeral using a pre-paid funeral plan. These may be better value for money, but you need to make sure you ask:

Does the plan cover all the costs of the funeral?

What happens if the funeral home goes out of business?

What happens if you die while overseas?

Sometimes buying a medically underwritten life insurance policy can be better value than an over-50s plan.

Getting money early from life insurance

If you want to take money early from a life insurance policy, you can cash it in or sell it on. But cashing in or selling a life insurance policy is a big decision. If you do this, the policy will not pay out to your beneficiaries when you die. You may want to think about how they would manage financially before making a decision.

Cashing in an investment policy

Some types of life insurance are investments and can be cashed in early. You won’t get back all of the money you have paid in as premiums. You just get the cash value of the part of the policy that has been invested. But that cash value may be low, especially if you have not had the policy for very long.

Cashing in a protection policy

Some life insurance policies include an extra benefit called ‘terminal illness benefit’. This means the insurer will pay out the full amount of the insurance cover straight away if you are expected to live for less than 12 months. You keep the payout even if you live for longer. You can use the money for any purpose. You should check with your insurer to see whether this benefit is included in your policy.

Selling a life insurance policy

An alternative to cashing in a life insurance policy is to sell it to someone else in return for cash immediately. This is done through a specialist company. The buyer takes over paying the premiums and they get the payout at the end of the policy. This option is only available for endowment policies.

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